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Federal Reserve split on timing of stimulus reduction

The Washington Post

The Federal Reserve debated changing its plans for raising interest rates so it could keep its easy-money policy in place longer, according to documents released Wednesday.

The minutes of the Fed’s policy-setting meeting in July show that officials discussed at length for the first time whether they should alter the terms of their landmark promise to keep short-term rates near zero until inflation reaches 2.5 percent or the unemployment rate hits 6.5 percent. The ideas broached included lowering the target for unemployment and establishing a floor for inflation. The Fed also considered providing more detail about what it would do once its existing thresholds are met.

Although the central bank ultimately decided not to make any policy changes during the July meeting, the discussion underscores the challenge facing the Fed as it grapples with the best way to wind down its unprecedented stimulus of the American economy. As the recovery strengthens, the Fed must find a way to withdraw its support without frightening the markets or the public, which could undo its careful work.

That delicate balance is exemplified by the reaction to the Fed’s announcement in June that it will begin scaling back its multibillion-dollar bond-buying program this year. The purchases, often referred to as quantitative easing, were intended to bring down long-term interest rates and goose the recovery. But markets panicked at the prospect of a “tapering” of bond purchases, igniting a selloff in the stock markets and a spike in bond yields. Investors have become fixated on when the reduction will start, leaving markets jittery.

On Wednesday, the markets were on a hair trigger as traders awaited further clues about the Fed’s intentions. Stocks plunged when the documents were released, then rebounded briefly before moving back into the red. The Dow Jones industrial average closed down 0.7 percent, while the broader Standard & Poor’s 500 index lost nearly 0.6 percent. Yields on 10-year Treasury bonds rose 4 cents to $2.86.

The meeting minutes released Wednesday revealed that Fed officials remain divided over when to begin the slowdown. Some called for “patience” while additional economic data roll in, while others suggested “it might soon be time” to taper the purchases, according to the documents. The Fed voted at the meeting to keep its bond-buying unchanged.

Although officials did not agree on when to begin scaling back, the minutes indicated there was general consensus supporting the timeline for ending the program that was laid out by Fed Chairman Ben Bernanke. He has said the first reduction in bond purchases will occur this year and they will end in mid-2014, when the unemployment rate is expected to be about 7 percent. But some officials felt too much emphasis was being placed on the level of joblessness when the program concludes.